Feb 8 - Fitch Ratings has affirmed Old Republic International Corporation's
(ORI) holding company ratings, including the senior debt rating at
'BB+'. Fitch has also affirmed the Insurer Financial Strength (IFS) ratings of
ORI's insurance subsidiaries at 'A-'. The Rating Outlook is Stable. A full list
of ratings follows at the end of this release.
KEY RATING DRIVERS
The affirmation of ORI's ratings reflect its property/casualty and title
insurance subsidiaries' solid capitalization, sound underwriting results, and
conservative reserving practices. This is offset by continued operating losses
in Republic Financial Indemnity Group, Inc. (RFIG), the runoff mortgage
insurance and consumer credit indemnity (CCI) businesses.
ORI reported an operating loss for the fifth straight year in 2012, largely due
to continued losses related to its mortgage insurance (MI) business. ORI
reported a pretax operating loss of $176 million in 2012 compared with a loss of
$352 million in 2011. Republic Financial Indemnity Group, Inc. (RFIG), the
runoff mortgage insurance and consumer credit indemnity (CCI) businesses,
continues to weigh down profits. The segment reported a smaller loss during
2012, but results will likely remain negative through at least 2014.
The company's property/casualty (P/C) operations remain strongly capitalized
with a NAIC risk-based capital ratio of approximately 391% of company action
level as of Sept. 30, 2012, and net premiums written-to-surplus of about 0.8x.
Additionally, ORI's score on Fitch's Prism capital model was 'very strong' at
year-end 2011 and is expected to remain relatively constant at year-end 2012.
ORI's title companies remain firmly capitalized despite modest deterioration due
to rapid growth over the past several years, as profits have been largely
retained within the businesses. Operating leverage was approximately 4.8x as of
Sept. 30, 2012 compared with 5.2x and 3.6x at years-end 2011 and 2008,
respectively. Fitch's 2012 risk-adjusted capital (RAC) ratio for ORI's title
operations is expected to remain within Fitch's guidelines though modestly lower
than the 167% at year-end 2011 (please refer to Fitch's 'Title Insurance (U.S.)
-- Sector Credit Factors' for model changes).
ORI's underlying P/C business remained profitable in 2012 with a combined ratio
of 98.7% compared with 94.4% in 2011, excluding CCI in both periods. The
deterioration is largely due to weaker results in its workers' compensation and
commercial auto lines.
The workers' compensation industry is adversely affected by weak unemployment,
which typically leads to longer periods of disability for injured workers, low
interest rates and medical inflation. ORI has increased rates with further
hardening expected in 2013; however, it may be insufficient to offset
inflationary trends in loss costs. Higher loss cost trends in commercial auto
(trucking) and general liability also contributed to weaker underwriting results
ORI's title insurance operations reported improved underwriting results again in
2012 with a 96.8% combined ratio compared with 99% in 2011. The segment's growth
over the past several years has led to significant market share gains, but the
pricing adequacy of this business remains uncertain, in Fitch's view.
ORI's ratings also reflect solid debt servicing capability from dividend
capacity in its p/c and title insurance subsidiaries. Additionally, ORI has
approximately $234 million of cash in highly liquid securities held at the
holding company and non-regulated subsidiaries. ORI's year-end 2012 financial
leverage ratio declined to approximately 15% (excluding unrealized investment
gains) from 21% in 2011 following the repayment of debt in May 2012.
ORI's title subsidiaries are considered 'very important', and Fitch believes the
parent remains committed to these operations. Given that group ratings and the
title subsidiaries' stand-alone ratings have been equalized, parental support is
irrelevant at current levels. However, parental support remains critical to the
ratings in a scenario where uplift is applied.
Fitch's ratings of ORI at the holding company level remain notched down by one
additional notch from the operating company IFS ratings compared to standard
notching to reflect ongoing, albeit reduced, uncertainties related to the runoff
of RMIC and the risk this poses for ORI's debt.
Factors that could lead to an upgrade, including a movement to standard
notching, include a return to consistent operating earnings and positive
internal capital formation following five consecutive years of operating losses,
greater certainty of a successful runoff of RMIC with reduced adverse impact
from related operating losses. Other factors that could lead to an upgrade
include a favorable resolution to the CCI litigation/product and continued solid
Factors that could lead to a downgrade include:
--Heightened concerns related to CCI or the RMIC runoff compared to
expectations,including an adverse amendment to the Final Order by the NCDOI;
--A weakening of debt servicing capabilities, whereby holding company liquidity
and statutory dividend capacity cover interest expense by less than 7x, which
would represent a 75% drop from approximately 28x at year-end 2012;
--Significant deterioration in P/C capitalization, whereby ORI's score on
Fitch's Prism capital model deteriorates to 'adequate' or operating leverage
increases above 1.4x;
--Deterioration in P/C underwriting results with combined ratios above 105%;
--Increase in financial leverage to levels near 30%.
Fitch affirmed the following ratings with a Stable Outlook:
Old Republic International Corp.
--IDR at 'BBB-';
--$550 million 3.75% senior notes due March 15, 2018 at 'BB+'.
Bituminous Casualty Corp.
Bituminous Fire & Marine Insurance Co.
Great West Casualty Co.
Old Republic Insurance Co.
Old Republic Lloyds of Texas
Old Republic General Insurance Co.
Old Republic Surety Co.
Manufacturers Alliance Insurance Co.
Pennsylvania Manufacturers' Association Insurance Co.
Pennsylvania Manufacturers Indemnity Co.
American Guaranty Title Insurance Co.
Mississippi Valley Title Insurance Co.
Old Republic National Title Insurance Co.
--IFS at 'A-'.
Dafina M. Dunmore, CFA
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Doug M. Pawlowski, CFA
Keith M. Buckley, CFA
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email:
Additional information is available at 'www.fitchratings.com'. The ratings above
were unsolicited and have been provided by Fitch as a service to investors. The
company did not participate in the rating process except through public
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CONDUCT' SECTION OF THIS SITE. NORMAL RATINGS Old Republic International Corp
Fitch Affirms Old Republic International Corp.'s Ratings; Outlook Stable
Old Republic International Corp Old Rep ORI.N USD 3182248568 0.95529 INDEX
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